Podcast Beta
Questions and Answers
What is the primary role of a financial manager?
In a cost-benefit analysis, what determines if a decision is good?
Which of the following disciplines is NOT used in real-world opportunities?
What is the primary goal of a competitive market?
Signup and view all the answers
What determines the attractiveness of an opportunity?
Signup and view all the answers
What is the role of the financial manager in decision making?
Signup and view all the answers
What is a key characteristic of a competitive market?
Signup and view all the answers
What is the goal of a financial manager when making decisions?
Signup and view all the answers
What is the primary factor that determines the value of a commodity or asset to a firm or its investors?
Signup and view all the answers
According to the Valuation Principle, what should be used to evaluate the benefits and costs of a decision?
Signup and view all the answers
Why do only current prices in a competitive market matter in the Valuation Principle?
Signup and view all the answers
What is the Law of One Price?
Signup and view all the answers
What is arbitrage?
Signup and view all the answers
What is an arbitrage opportunity?
Signup and view all the answers
What is the time value of money?
Signup and view all the answers
What is the main goal of Enterprise Risk Management?
Signup and view all the answers
What is the name of the professional organization for Risk and Insurance Management?
Signup and view all the answers
What is the term for the absolute maximum dollar amount of damage?
Signup and view all the answers
What type of property includes patents and human capital?
Signup and view all the answers
What is the term for the value of an asset or property at the time of loss?
Signup and view all the answers
What is the process of identifying and assessing potential events that may impact an organization?
Signup and view all the answers
What is the term for the disruption or failure of a firm in a supply chain?
Signup and view all the answers
What is the term for the process of evaluating and prioritizing potential losses?
Signup and view all the answers
What is the book value of a firm roughly equal to?
Signup and view all the answers
What does market value capture that book value does not?
Signup and view all the answers
What is the replacement value of an asset?
Signup and view all the answers
What is an example of a liability risk?
Signup and view all the answers
What is vicarious liability?
Signup and view all the answers
What is an example of a tort?
Signup and view all the answers
What is strict liability?
Signup and view all the answers
What is workers' compensation?
Signup and view all the answers
What is negligence in the context of torts?
Signup and view all the answers
What is the purpose of punitive damages in tort law?
Signup and view all the answers
What is the 'res ipsa loquitur' tactic used for in court?
Signup and view all the answers
What is a type of human resource risk that can result in loss of income and business continuation problems?
Signup and view all the answers
What is a type of damages that compensates for the loss of life's pleasures?
Signup and view all the answers
What is the standard of proof required in a tort law case?
Signup and view all the answers
What is vicarious liability?
Signup and view all the answers
Why is it important to regularly review and update risk management processes?
Signup and view all the answers
Study Notes
Cost-Benefit Analysis
- The role of a financial manager is to make decisions on behalf of the firm's investors, ensuring that the benefits of a decision exceed the costs.
- Real-world opportunities often involve multiple disciplines, including marketing, economics, organizational behavior, strategy, and operations.
- A decision will increase the value of the firm if the value of the benefits exceeds the costs.
Market Prices and the Valuation Principle
- In a competitive market, the price determines the value of a good, and personal opinions of the "fair" price are irrelevant.
- The Valuation Principle states that the value of an asset or commodity to the firm or its investors is determined by its competitive market price.
- The benefits and costs of a decision should be evaluated using market prices.
- If the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm.
- Current prices in a competitive market are the only relevant prices when evaluating a decision.
The Law of One Price and Arbitrage
- The Law of One Price states that securities with the same cash flows must have the same price in competitive markets.
- Arbitrage is the method of buying something in one place and selling it in another place at the same time to make a profit from the price difference.
- An arbitrage opportunity is a situation where it is possible to make a profit without taking any risk or making any investment.
The Time Value of Money and Interest Rates
- A dollar today is worth more than a dollar in one year due to the time value of money.
- The time value of money is the difference in value between money today and money in the future.
- If you deposit $1 at a 10% interest rate, you will have $1.10 at the end of one year.
Enterprise Risk Management
- Ultimate objective is to handle risks harmonious with the strategic plan
- Making pre-loss arrangements for post-loss resources
- Need for loss identification and risk identification
Employment
- Staff varies based on size and responsibility
- All firms and people engage in risk management
- Career opportunities internally to firms and externally, like consultants and brokers
- Occupation is professionally recognized – RIMS – Risk and Insurance Management Society
Useful Methods
- Identify & Measure (evaluate)
- Choose most efficient tool(s) for Control
- Implement and review
Risk Identification
- Identify how and what to identify:
- Balance sheet
- External/Internal
- Income statement
- Pure/Speculative
- Other records
- Direct losses
- Indirect losses
- Key personnel
- Operations
- Checklists
- Flow charts
- Questionnaires
Measure (Evaluation)
- Maximum possible loss: the absolute maximum dollar amount of damage
- Maximum probable loss: a conservative estimate of what is likely to occur in a worst case loss
- Relative Frequency: an estimate as to the number of times the loss will occur
Property Risks
- Tangible Property:
- Real Property
- Business Property
- Intangible Property:
- Patents
- Human Capital
- R&D
- Reputation
- Brand Awareness
Property Risks
- Damage to the Property of Others:
- Supply chains are interconnected
- Disruption or outright failure can occur at a firm
- Affecting other firms in supply chain
Valuing Property
- Replacement value versus book value versus actual cash value versus market value
- Book value: net value of a firm's assets found on its balance sheet
- Market value: company's worth based on the total value of its outstanding shares in the market
- Replacement value: amount of money that could be obtained by replacing the existing asset
Liability Legal Grounds
- American legal system based on the notion that a person should be responsible for the damage caused to others
- Negligence:
- Failing to use reasonable care according to a “reasonable man” standard
- A reasonable person thinks before speaking or acting, and is honest and moderate in all activities
- Question of fact
- Other parties can be held liable:
- Vicarious liability
- Joint-and-several liability
Establishing Negligence
- Plaintiff must show:
- Legal duty
- Failure of the duty
- Injury
- Causal connection between the injury and the failure
- Jury must weigh the facts based upon “the preponderance of evidence”
Types of Damages
- Compensation for Personal Injuries:
- Medical
- Lost wages
- Future wage loss
- Pain and suffering
- Punitive Damages:
- Compensation to punish a defendant for outrageous acts
- Punitive damages against insurers:
- When insurers act in bad faith in resisting an insured’s legitimate claim
- Other Damages:
- Hedonic damages - loss of life’s pleasures
- Mental anguish
Human Resource Risks
- Loss of Key Person
- Disability – physical (medical) or mental
- Loss of health
- Unplanned retirement
- Results in loss of income, business continuation problems, replacement and training issues
Review and Update
- Regularly review and update the process:
- New assets or disposal of assets
- Valuation changes
- New products, processes, and operations
- New personnel
- Law changes
- Currency fluctuations
- New contractual relationships
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Learn about the role of a financial manager in making decisions that maximize benefits while minimizing costs and understand the concept of market prices and valuation principle.
